Tax Litigation Security for Costs

Introduction

Oswal v FCT [2015] FCA 1366 (2 December 2015) has clarified aspects of the law in respect of the Commissioner’s entitlement to security for costs in litigation.

In particular, the Federal Court of Australia (FCA) seems more amenable to ordering security for costs in tax matters (other than appeals) because such orders could be avoided by appealing to the Administrative Appeals Tribunal (AAT).  This may force taxpayers to appeal to the AAT.

Practitioners will need to advise taxpayers regarding security for costs to ensure otherwise meritorious FCA appeals are not restricted, stayed or dismissed as a result of a large security for costs order against the taxpayer.

Legislative references are to the Taxation Administration Act 1953 (Cth) (TAA 1953), the Federal Court of Australia Act 1976 (Cth) (FCAA 1976), the Federal Court Rules 2011 (Cth) (FCAR 2011) and the Foreign Judgments Regulations 1992 (Cth) (FJR 1992).

Security for Costs

The Commissioner may apply with supporting affidavit to the FCA for orders that the taxpayer to give security for costs with the proceedings stayed until the security is given and for the proceedings to be dismissed for failing to give that security (sec. 56 FCAA 1976; Rule. 19.01 FCAR 2011).

Security for costs provides an estimated fund (Pathway Investments P/L v National Australia Bank Ltd [2012] VSC 97 at [37]) within Australia which will ensure the Commissioner, if successful, will be able to recover costs ordered by the FCA (Campaign Master (UK) Ltd v Forty Two International P/L (No. 3) [2009] FCA 1306 at [100]).

The discretion to order costs is unfettered without any predisposition in favour of awarding costs and it is not appropriate to list all the circumstances to be considered (KP Cables Investments P/L v Meltglow P/L (1995) 56 FCR 189 at 196 - 198).

Relevant Principles

In the FCA considering security for costs:

  1. the Commissioner bears something of an onus of establishing that security for costs should be granted (Robertson v Knott Investments P/L (No 2) [2010] FCA 796 at [13);

  2. Part IVC TAA 1953 proceedings are essentially defensive and while an order should not be made against a person defending themselves and who is forced to litigate that principle is less compelling where the assessments could have been challenged in the AAT (where there is no power to order costs) (Oswal v FCT (No 2) [2015] FCA 1143 at [54] - [55]; [2015] FCA 1366 at [43] - [44]);

  3. once a prima facie, bona fide regular cause of action with a reasonable prospect of success is established, the strength of the claim is a neutral factor in exercising the discretion (Jazabas P/L v Haddad [2007] NSWCA 291 at [84]);

  4. however, Part IVC TAA 1953 proceedings which are reasonably arguable weighs heavily in favour of not ordering costs against a natural person (Oswal v FCT (No 2) [2015] FCA 1143 at [38] and [45]);

  5. circumstances weighing in favour or an order for security on costs includes that the person is ordinarily resident outside Australia (Mentink v Registrar of Ships [2009] FCA 871 at [10]) without sufficient assets in the jurisdiction (Oswal v FCT (No 2) [2015] FCA 1143 at [56]);

  6. whether the costs application is oppressive such as being used to frustrate the right to litigate and whether any impecuniosity was caused by the Commissioner (M A Productions P/L v Austarama Television P/L (1982) 7 ACLR 97 at 100);

  7. whether there are any persons standing behind the taxpayer who are likely to benefit from the litigation (e.g. company directors/shareholders or litigation funders) and who would be willing to provide the necessary security (KP Cables Investments P/L v Meltglow P/L (1995) 56 FCR 189 at 196 - 198);

  8. it would be rare for security for costs to be awarded to the FCT against an individual appealing a decision from the AAT (Fletcher v FCT (1992) 37 FCR 288 at 293);

  9. whether the order for security for costs or quantum of costs would stultify the proceedings having regard to evidence of the financial position of the taxpayer and persons standing behind the taxpayer (Jazabas P/L v Haddad [2007] NSWCA 291 at [91]);

  10. the quantum of costs may include relevant pre-commencement costs, costs up to the security for costs application, costs up to trial (Pathway Investments P/L v National Australia Bank Ltd [2012] VSC 97 at [8], [53]) and costs of the trial (Equity Access Ltd v Westpac Banking Corp [1989] FCA 361);

  11. if notification of the security for costs application is unreasonably delayed (e.g. 3 months delay too long: Robertson v Knott Investments P/L (No 2) [2010] FCA 796 at [22]; 7 months delay too long: Wyong-Gosford Progressive Community Radio Inc v ACMA (No 2) [2006] FCA 1043; 10 months delay was not too long: Gartner v Ernst & Young (No 3) [2003] FCA 1437 at [34]), only prospective costs might be ordered;

  12. the taxpayer cannot resist an order for costs merely by showing without more (e.g. evidence of foreign assets available to satisfy the judgment) that the taxpayer resides in a jurisdiction where a judgement for costs would be enforceable under the FJR 1992 (Farmitalia Carlo Erba Srl v Delta West P/L [1994] FCA 950 at [21] - [24]);

  13. where the taxpayer resides in a jurisdiction where a judgement for costs would be enforceable under the FJR 1992, the costs might be limited to the additional costs of enforcement in the foreign jurisdiction (Barton v Minister for Foreign Affairs [1984] FCA 89 at [27] - [28]);

  14. the quantum of costs should be discounted where a judgement for costs would be enforceable under the FJR 1992 (Oswal v FCT (No 2) [2015] FCA 1143 at [59]);

  15. the quantum of costs should be discounted for contingencies (e.g. 20% discount for costs up to the costs application and 50% for costs up to trial) (Pathway Investments P/L v National Australia Bank Ltd [2012] VSC 97 at [55]).

The Commissioner's affidavit in support of the security for costs application should address (Rule 19.02 FCR 2011):

  1. the likely amount of the costs of the Commissioner (e.g. by costs consultants);

  2. the reasons for the Commissioner believing the taxpayer is impecunious or will otherwise be unable to pay judgement costs including details of the taxpayer’s known assets in Australia and outside Australia and the taxpayer’s liabilities, income and outgoings (Australian Equity Investors An Arizona Limited Partnership v Colliers International (NSW) P/L [2011] FCA 1041 at [33] - [34]);

  3. the reasons for the Commissioner believing that the taxpayer is ordinarily resident outside Australia (Mentink v Registrar of Ships [2009] FCA 871 at [10]);

  4. whether the taxpayer’s country of residence has reciprocal enforcement of judgement costs under FJR 1992;

  5. whether the taxpayer is suing for someone else’s benefit (e.g. a director/shareholder, a creditor or litigation funder) (Knight v Beyond Properties P/L [2005] FCA 764 at [27]; Oswal v FCT (No 2) [2015] FCA 1366);

  6. any other relevant matter (e.g. on the face of the pleadings there is no prospect of success or the proceedings are frivolous or vexatious) (Staff Development & Training Centre P/L v Cth [2005] FCA 1643 at [12] - [13]).

The taxpayer's submissions and affidavit in defence of the security for costs application should address:

  1. a prima facie, bona fide regular cause of action with a reasonable prospect of success;

  2. the chronology of the security for costs proceedings to establish any unreasonable delay;

  3. the residency of the taxpayer;

  4. the taxpayer’s assets in Australia and outside Australia and the taxpayer’s liabilities, income and outgoings to establish that the taxpayer is able to pay a judgement for costs;

  5. alternate evidence (e.g. by costs consultants) of the likely quantum of pre-commencement costs, costs up to the security for costs application, costs up to trial and costs of the trial;

  6. the basis the Commissioner caused any impecuniosity (Sylverton P/L v Minter Ellison [2011] FCA 1072 at [10]).

In default of giving the security, the FCA can grant leave to the Commissioner to apply for the proceedings to be dismissed (Thirteenth Corporation P/L v State [2006] FCA 979).  A self-executing order dismissing the proceedings in default of giving security may be a relevant consideration weighing against an order for security for costs (Oswal v FCT (No 2) [2015] FCA 1366 at [63]).

The security for costs application is heard by a Registrar of the FCA and is appealable by way of re-hearing on the merits to a judge of the FCA (Sec. 35A FCAA 1976; Dekkan v Macquarie Leasing P/L [2008] FCA 1235 at [4] - [5]).

A security for costs order may be set aside or varied as a result of a material change of circumstances or discovery of new material which could not reasonably have been put before the court (Capital Webworks P/L v Adultshop.com Ltd [2008] FCA 40 at [12]; Gurtler v Finance Now P/L [2009] FCA 631 at [12]).